Inspired by 20% monthly mining vs 5% monthly trading

What would prevent me from investing $1,000 for a month, pulling out, investing with a different scammer, rinse & repeat?

This question is not specific to the inspiration question but Ponzi/Madoff/investment scams in general. What stop-gaps do scammers implement to prevent me from actually taking advantage of them?

Are there legally binding stop-gaps such as contractual clauses which state something like "Must invest for 12 months minimum. Early withdrawal forfeits all interest and costs 20% of principle."

Does anyone have samples of real scammer investment contract clauses which could be considered as stop-gaps?

up vote 141 down vote accepted

The scammers not giving your money back would prevent you from pulling out of the "investment" (scam). They may pay out the claimed returns for a month or a few months in order to build credibility to get more "investors", but if they're trying to scam you, there is no way they'd give back all of your money once they have it.

As comments and other answers have pointed out, scams like these may be willing to return all of a victim's investment in some cases to maintain the appearance of legitimacy, in order to attract more "investors" (victims). What prevents you from exploiting this to scam the scammers is that they have a lot more information than you. They know how much money they have, how much they are expecting to bring in, and whether it's worth it to them to pay you off. You may think you're an early investor and can safely get your money back, but the scammers may be ready to cut and run, and have already decided you get nothing. They know these things; you can only guess.

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    If you're early enough in the ponzi and you're a small enough investor, you might get your money back since they want to ride the appearance of legitimacy as long as possible, but hardly a good gamble to take. – Hart CO Sep 12 at 16:31
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    This. They have a business approach. As long as the expected income from new victims falling for the scam as the result of one person successfully pulling out, they will allow it. There is a sweet spot, and you have no control or view over it. For all you know it might be “right away”. – spectras Sep 15 at 2:39
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    Sounds like a typical pension to me :) – Cloud Sep 17 at 13:17

(Under US investment laws)

Assume for the moment that you succeed in your plan. You invest some money in the Ponzi scheme, accumulate some "earnings" on paper, and then are able to get the scammer to return your original investment and your "earnings". You then find another Ponzi scheme and repeat...

Things look great for you...

Then, the Ponzi schemes falls apart, as they must.

What follows is detailed here: https://www.wilsonelser.com/files/repository/PHLY_Article_Clawback.pdf

Briefly:

Various government agencies (SEC, SIPC) appoint a Trustee to liquidate the Ponzi scheme's assets to pay off the defrauded investors to the extent possible.

The Trustee can reclaim to the scheme, for this purpose, various amounts paid out previously to investors; these amounts fall into various categories.

Money paid out shortly before the collapse can be reclaimed in total, principal and "earnings". No guilt on the part of the recipients is implied or necessary. Insiders have a longer definition of "shortly".

If you innocently receive a pay-out before the "shortly" period above begins, the returned principal is safe. But the "earnings" can be reclaimed, as they are really some one else's investment, distributed to advance the fraud.

Most relevant to the OP: If you know, or should reasonably have known, that the investment is a Ponzi scheme, ("guilty mind") then all payment to you from the scheme (principal and earnings) can be retrieved by the trustee.

The trustee can only go back so many years to reclaim payouts; the number varies from state to state, as well as federally.

So let's say you invest $1000 in Ponzi #1, get out with $1200, put $1000 in Ponzi #2 etc., etc...

After Ponzi #5 you have your original $1000 and $1000 more total from scamming the scammers. And you knew they were scammers, and you invested anyway.

You could owe various trustees a total of $6000...

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    Although there is definitely guilt here. After all, when you attempt to withdraw, you are knowingly and intentionally requesting an unlawful preferential transfer. You won't make any money unless the scheme operator actually does perform that unlawful transfer at your request. – David Schwartz Sep 13 at 22:40
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    I'd be interested to know how many Ponzi schemes actually get disbanded by the US government though? How many are able to operate for a short time like 6 months and disappear without a trace? What happens to foreign Ponzis as described in the inspiration article? – MonkeyZeus Sep 14 at 16:41
  • @DavidSchwartz Only if you know that it's a Ponzi scheme. There are some innocent people who believe that they gave money to someone who made legitimate investments on their behalf which showed a profit returned. Especially since usually the scheme depends on the victims not knowing that the plan is for them to be the victims... – user3067860 Sep 14 at 17:26
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    @MonkeyZeus In all likelyhood, the foreign schemes aren't Ponzis at all, they will just take your money and stop returning your calls/emails. Especially if you've paid them in something like bitcoin. – mbrig Sep 14 at 17:27
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    @user3067860 I'm responding to the OP's specific case where he knows that if he is going to get any return, it almost certainly must be other people's investments and cannot possibly be legitimate proceeds of a solvent business (because the promised proceeds are impossible for a legitimate business to produce or sustain). The OP is specifically constructing a scheme that he believes will lead an insolvent business to make a preferential transfer to him. – David Schwartz Sep 14 at 18:00

What would prevent me from investing $1,000 for a month, pulling out, investing with a different scammer, rinse & repeat?

Here's how it would typically go:

  1. Scammer offers guaranteed return of 5%/month.
  2. You give scammer $1,000.
  3. Scammer sends you a statement after first month showing 5% return, or distributes 5% to you for some number of months. This builds credibility and lures more "investors" in.
  4. You try to withdraw your initial investment, scammer stalls or refuses.

They typically want to maintain the appearance of legitimacy for as long as possible to keep new money rolling in, so if you are a smaller investor/victim early on, you may get your money back, as long as they can fund it they don't want to draw complaints, but it's not a smart gamble to take.

How long it goes and how likely people are to get some or all of their money back varies wildly. Some ponzi schemes run for years, during which some people actually do make money, but it's other people's principle.

Are there legally binding stop-gaps such as contractual clauses which state something like "Must invest for 12 months minimum. Early withdrawal forfeits all profit and costs 20% of principle."

Does anyone have samples of investment contract clauses?

Technically no contract with a scammer would be legally binding since they are acting in bad faith. But yes, some investments have penalties for early withdrawal. One legitimate example: I pay a penalty of 6-months worth of interest if I withdraw my 5-year CD early.

  • Assuming that the bad faith is not discovered for about 5 years then that clause is actionable by the scammer in the interim, right? – MonkeyZeus Sep 12 at 17:20
  • @MonkeyZeus Insomuch as they couldn't likely recover any of the money when it all falls apart, this becomes moot, but yeah you wouldn't know the contract was unenforceable from the jump, they'd likely take steps to keep money locked up as long as possible. – Hart CO Sep 12 at 17:46
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    "other people's principal", right? – mattdm Sep 15 at 14:06
  • Wouldn't someone running a ponzi scheme want to actively avoid going to court for almost any reason? If the scheme is, on it's face, apparently "legitimate" and contractual clauses could technically be enforceable, I struggle to see a scenario where the scammer would enter a court battle and accidentally disclose undesirable information rather than either acquiesce to the withdrawal request or decide it's time to take everything and run. – Ellesedil Sep 18 at 0:01
  • @Ellesedil Right, they'd avoid complaints if possible, they might use threat of legal action to try to dissuade withdrawal of funds, but if opposed it'd be foolish of them to actually take legal action since that could expose them. – Hart CO Sep 18 at 0:09

When Charles Ponzi was running his famous IRC scheme, he would pay out any investor that asked for their money with the interest that he had promised. More or less invariably they would reinvest that money. It didn't really matter to him as long as he kept getting an in-flux of new money.

In theory, any of those investors could have walked away with a pretty handsome profit. The question is when do you walk away? If you just doubled your money, why not double it again. You can always walk away after that, right?

So, maybe you could do it if you are smarter than the scammers. It's their game though and you probably don't know the rules. You could also find yourself subject to lawsuits from victims since the scammers are definitely not paying you out of their own pocket.

  • I probably would have reinvested half my money. If I managed to go through two cycles I would have doubled my money even if I got caught in the Ponzi collapse. – Joshua Sep 13 at 19:43
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    I don't know why anybody invested with that man... I mean he had the word "Ponzi" right in his name! ;-) – Michael Sep 14 at 16:46

One of the main properties of being a scam is that people who participate, overall, lose money. Some people take their money out early enough to come out ahead. On average, though, they don't. If you can reliably determine when the best time to take your money out is, then you can come out ahead ... but what makes you think you're any better at that than the average person? Ponzi schemes, pyramid schemes, and bubbles are similar in this way: if you think there's a stock price bubble, you might still be able to make money if it rises even more and you get out before it bursts. This is why a bubble can persist even when it's obvious that it's a bubble: people keep buying in hoping that they'll make money selling to other people hoping to to make money selling to other people hoping to make money ... etc. Of course, someone has to be wrong.

If the scammer does it right, then even if you're making money, you're not really making money from the scammer. If the scammer thinks they'll make more money from further marks by giving what they promised (on the other hand, if they think they're better off just taking the money and not giving any back, they'll do so), but then ultimately your money is coming from he other marks, not the scammer. In fact, in a way, everyone who gets out early from a Ponzi scheme is an accomplice: the whole point of giving them money is so that they'll tell other people how great the investment is, and the scammer will take their money, and give some of it back to the early investors. The money goes through the scammer, giving the participants some distance, but much like a pyramid scheme or a bubble, the people who make money from getting in early are getting their money from people who get in later.

And the law often recognizes this. If a scammer takes money from new marks and gives it to you, and this taking of money is deemed unlawful, then it wasn't the scammer's money to give away, so you aren't considered to have lawful possession. Much like if someone steals your car and then gives it someone else, you are allowed to take the car back from that other person even though they aren't the one who stole the car, people who lose money in Ponzi schemes can sue the people who got out early and force them to hand their profits over. This is known as "clawback".

So, in summary: this is a way to possibly to make some money, but very likely lose money, and even if you make money, you'll have to worry about being sued by the people who lost money.

As for stop-gaps, it is perfectly possible to say that an investment won't be paid back until a certain time (it's not like if you get a mortgage, the bank can demand you pay off the principal any time it wants). Some scammers do implement this, or come up with excuses why the money isn't immediately available, but normally, a Ponzi scheme is built around word of mouth from early investors making a lot of money, so keeping investors happy is important.

These lock-ins aren't just used by scammers, though; legitimate investment funds often enter very illiquid positions, and can suffer large losses if they try to exit early, and so often restrict when investors can pull their money out. Michael Burry, for example, saw that in 2002 a bunch of mortgages were being offered with teaser rates, and his investment fund bet heavily against the housing market on the basis that a lot of people would default once the teaser rate expired and they had to start making larger payments. These bets didn't pay off until the defaults, which were years away. Until then, on paper he was losing money month after month.

One thing some of the other answers have alluded to but not laid out explicitly is that even without legal interventions, without moral implications, and without the scammers explicitly barring your behavior, your strategy has a negative expected payout, at least it often does.

TLDR: If an optimal investor wouldn't make at least 172% in profits before the scam crashed, you won't be able to scam the scammer with your strategy.

Break-Even Point

Accepting some discretization errors, there's a surprisingly simple formula for the break-even interest rate in schemes like this (schemes offering periodic fixed interest which will pay out at any given point in time before a cliff, after which all money invested is lost).

If the scheme runs for n periods (e.g. n months) before exiting/bankrupting, and if your strategy is to invest for a single pay period, then for you to break even they need to offer an interest rate of 1/(n-1). If you prefer percentages, use 100/(n-1) instead.

Sample Calculations

For some sample payouts, consider what happens if the scammer offers 5% monthly and quits after a year. Your break even point was around 9%, so if you invested $1000 each month, you could expect to lose around $40 on average, or $480 over the course of the year. If instead you invested in the mining operation promising 20% monthly, you would profit a handsome $1320.

Improving the Strategy

Interestingly if the option is available to you, you're better off spending as little time with scammers as possible and making up for that in volume. Intuitively, the only "risk" in that model is the risk of rolling over their bankruptcy point, and by splitting a transaction that would roll over into several that won't and one that will you're increasing your overall profits.

That said, there's a fundamental limit at which no amount of splitting into smaller transactions will help. Imagine a hypothetical "investor" at day 0, and consider their earnings over the entire course of the scam. The break-even point for having a chance of scamming the scammers is when this ground-zero investor would multiply their profits by e~2.718. In other words, if the scam doesn't have high enough interest and a long enough runtime to generate 172% in profits for an optimal "investor", your strategy will lose money no matter how you play the game.

In other words, a Ponzi scheme can structure their scheme so that all attempts to scam them back with your technique will fail, even if every participant is trying to scam the scammer (standard assumptions about reasonably even distributions through time and lack of collusion between counter-scammers).

For example, a perfect investor in the monthly trading venture you linked would make almost 80% just before the crash if it ran for a year, and while large and compelling it is a far cry from 172%. It would have to run for nearly 21 months (do you trust a scammer to stay in business that long? I think Madoff was an exception) for you to be able to scam them effectively. The mining venture on the other hand offers a maximum of 1.2^12-1=792% over the course of a year, and it offers huge potential for exploitation.

Risk Management

You mentioned alternating between scammers with a fixed $1000 each time. What's interesting is that there isn't fundamentally any difference between investing $1000 with the same investor twice and investing $1000 separately with two different scammers (at least, discounting the increasing likelihood of the scam going out of business as time goes on).

The perceived security from investing in multiple ventures with small amounts of capital is that you're less likely to go bankrupt, but a similar effect is at play when you split your bankroll into multiple small payments and continue to counter-scam the same individual in one-month increments. Even though you're virtually guaranteed to eventually lose an investment in the end, you're also guaranteed to make up for it and then some in the interim -- at least, if it's a winnable investment.

Going further, if the scammer is offering a winning proposition (>172% profits) then your investments are more stable in the sense of having lower variance if you continue to invest the same small amounts in a single venture until they go bankrupt. If you randomly choose scammers and points in time to invest in them, even if all the investments could have been profitable (meeting that 172% threshold), you have the potential to get extremely unlucky and lose every bet at once. That can't happen if you transact with the same individual over and over, simply using small enough transactions to make the loss at the end manageable.

That isn't to say that you don't also want to diversify between scammers, but the reason to do so isn't to lessen the chance of losing everything in one go (getting hit with the blunt side of the inevitable fiscal cliff). The reason is to mitigate your losses from the chance that not all scammers will be in business long enough for you to hit that 172% threshold (keeping with our policy of blatantly ignoring legal effects, the potential for the scammer to retaliate and/or compensate, and so on).

I do not think what you do is scamming the scammer.

It's not scam at all.

However, this is the problem.

  1. You don't know when the ponzi will collapse.
  2. Most ponzi requires people to put some money on certain time. In financial.org, AFTER people put money, they add a special rule requiring minimum balance or whatever so people have to put more money.
  3. When a ponzi is dying it has ways to prevent you from getting your money without triggering anger of investor. Financial.org is in this stage.

But yea, you can pull this out. It's very risky. You are better off trading coins directly.

Every single "investment" that pays constant in dollar is ponzi.

The reason is simple. If I can generate 5% return per month in dollar with no risk, why would I need you to invest? I can just borrow from banks.

The traditional way for such a scam to work is to get lots of little investors involved, giving them a good return, even returning some/all of their money. That's seed money.

Word of success then spreads and when the perps get enough big fish on the hook, they fold up shop, absconding with a chunk of change. They then set up in another location under a different name and begin the process again.

Human greed and gullibility are the driving forces for the success of this.

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    You explain what a Ponzi scheme is, but you haven't answered his question, have you? – donjuedo Sep 12 at 21:24
  • @donjuedo - Given that the OP asked about Ponzi/Madoff/investment scams and given that you think that I have explained what a Ponzi scheme is then I'd say, Mission Accomplished. I suppose that you'll have to read between the lines a bit to understand the nuances. – Bob Baerker Sep 12 at 21:33
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    Not trying to be snarky here, but he asked what would prevent him from getting in then out. That's what I was looking for in your answer. I gather that there's nothing really preventing that, like there's nothing preventing one from playing Russian Roulette. Risk is the simple downside. – donjuedo Sep 12 at 21:41
  • @donjuedo - The nuance is that since he is a little fish, the perps may let him out because in the grand scheme of things, the amount of money he put in and is paid out is peanuts. Of greater value is the potential PR of his high percentage return. He is likely share or even brag to others. Should one of those recommendations turn into a bigger fish, the perps are on the road to success. Multiply that by many little fish hooking a decent number of bigger fish and when AUM (snark) is sufficient to walk away, Poof! They and the money is gone. – Bob Baerker Sep 12 at 22:43
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    @BobBaerker and those comments would be the answer. Please edit them in. Without them this does not answer the question (explicit is policy, implicit and nuance is not). – user73687 Sep 13 at 14:56

The real simple answer why you can't do that as a business is that: They're scammers!. You can not know what their real book situation is and you have no way of knowing if they have enough money to pay you to get out or not. It doesn't matter if it's 1 week or 2 weeks, even if the risk(certainty) that they will stop paying goes up with time.

So there is no guarantee at all that you can take out your money at all. Very quickly, in one of these scams you will lose all your capital that you put in and you will lose all that you made in your previous gambles.

Investments scams online have been a thing for almost 20 years now. Some of them pay for a time, some of them do not pay at all. If you were to invest money into each one of them and pull out two weeks after you would be losing money quite quickly. They have been a thing offline for hundreds of years - there is no winning strategy to knowingly investing in scams except to run the scam itself.

As someone who is putting money into such scams you will not have any indicators of when they will stop out paying - it might be next year, it might be tomorrow - but what is constant is that majority of people will lose money - for some reason your assuming that you will not be part of the majority for majority of the scams.

More than that, the more money you invest in them the more likely it is that you will never see your money again.

Note that there have been plenty of people who do this, invest in ponzischemes on purpose - most of them work on the same principle as one armed bandit addicts in vegas, they think they have figured out the paying seasons and such and some of the them are better at judging if a scam will work for a few weeks, but it really is just a losing game still - just the same as some people think they can judge if a coin gambling machine is "about to be in payout phase" or whatever.

Coin machines is better though, it's lower risk and more easy to calculate that if you play this amount of time you will lose this amount of money. With investment scams you might even be on the hook to criminal charges simply for winning money out of it.

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